costing and budgeting - spmbook · • costing: determining the bare costs to deliver a project •...

From cost to value: methods and techniques to set the right cost to software

Costing and Budgeting

spm - ©2014 adolfo villafiorita - introduction to software project management

Goals of the Unit

• Questions you might face: – How much does the development of the software cost? – Is the project on budget?

• Goals of the Unit – Budgeting – Managing Project Costs

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Initiate Plan Execute &Monitor

Close

Develop

Mon

itor G

oals

, Cos

t and

Sc

hedu

le Release

Change Control & Configuration Management

Quality Management

Human Resource Management

Kick OffActivities

Formalize Goals

Define Schedule

Define Costs

Assess Feasibility CloseCollect

Outputs

[ObtainApproval]

Risk Management


Some Definitions

• Costing: determining the bare costs to deliver a project

• Budgeting (and cost control): determining the financial needs of a project and preparing the books to monitor expenditures (and incomes)

• Pricing: determining how much you will charge for the project

• Life Cycle Cost (LCC) (also called Total Cost of Ownership): costs to be sustained to operate (use) a system throughout its lifecycle

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(Software) Project Costing



• Project cost: – The expenses we will incur into to finish a project – It does not take into account profit – Made of direct and indirect costs (next slide)

• Cost Element Structure: – Hierarchical structure which defines the cost items which

determine the project budget – It helps structure the costing and monitoring processes and

it reduces the risk of double accounting the same expenses

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Direct Costs• Direct costs: costs related to the production of the project

outputs • Direct Costs for software projects

– Personnel: * The salaries of people directly involved in the project (gross, not net!)

– Materials and Supply * Costs of the material necessary to produce project outputs * Usually accounted if the project has specific needs

– Hardware and software * Systems required for developing the system * Usually accounted if the project has specific needs

– Travel, meetings and events – Other Costs

* Books, Training, Renting equipment, …

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• Indirect Costs: expenses necessary to run the facility and make work actually doable

• Main cost elements for software development: – General Overheads

* Office space costs (rent, heating, ...) * Consumables * Standard equipment * Administrative Staff

– Project Overheads * For larger projects, overheads directly accountable to a project

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Indirect Costs Computation• Identification of the expenses contributing to the indirect costs • Identification of a strategy to allocate indirect costs to a project

– According to the effort (more effort = more indirect expenses) - Flat or proportional rate

– According to the project budget (as a percentage of the project budget)

• On a regular basis – Assessment of the expenses incurred into in the previous year(s) – Estimation of the indirect expenses for the year(s) to come – Estimation of the effort which can produced – Determination of the overhead rate

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Personnel Costs: Gross vs. Net

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Employer

Employee

Regional/National Tax

National/Federal Tax

Retirement Funds

€ 60K

SalaryBonuses

€ 30K

←GROSS!

←NET!


nX

j=1

Hoursj ⇤ (PCj +Oj) +nX

i=1

Ci

Project Cost is...

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H Total number of hours for profile jPC Cost of profile jO Overhead of profile jC Cost Element i (e.g. hardware)


Project Cost

• Project costs can be looked at from different “points” of view: – Cost Element Structure (how much do I need for

hardware?) – Project Structure (how much do I need for “Writing

Requirements”?) – Expenditure over time (how much do I need in 2014?)

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Managing Project Costs


Goals and Means

• Goals – Ensuring that the money is available when it needs to be

spent – Monitoring project expenditures so that the project remains

within budget, or the appropriate actions can be taken when this is not the case

• Means – Definition of a baseline/cash flow (see next slides) – Expense Authorization – Expense book keeping (double entry accounting is quite

fine)

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CES

CES1

CES2

CES3

CES3.1

CES3.2

CES3.3

CES2.1

CES2.2

WBS

A1 A2

A2.1 A2.2 A2.3A1.1 A1.2

Cost

Cost

Cost

Project Costs and Project Structure

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Sheet1

Page 1

Q1 Q2 Q3 Q4 Total

Expenses

Expense 1 € 10,000 € 30,000 € 50,000 € 10,000 € 100,000

Expense 2 € 20,000 € 40,000 € 60,000 € 120,000

Total Expenses € 30,000 € 70,000 € 110,000 € 10,000 € 220,000

Incomes

Payment € 50,000 € 200,000 € 250,000

Total Incomes € 50,000 € 0 € 0 € 200,000 € 250,000

Balance € 20,000 -€ 70,000 -€ 110,000 € 190,000 € 30,000

Financial Need -€ 50,000 -€ 180,000

Project Costs and Time

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ABC

10002000400

500 5001000 1000

100 100 100 100

500 1500 1100 100 100 100Total500 2000 3100 3200 3300 3400Cumulative

0

1000

2000

3000

4000

M1 M2 M3 M4 M5 M6

500

2000

3100 3200 3300 3400

PlannedCostName Time

AB

C

ABC

10002000400


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Time

Total costs

Time

Total Costs

Early Start

Late Start


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Banana Shape


Expenditure/Load Profile

• In general we assume workload distributes uniformly during an activity: – A resource working in an activity requiring 40 hours of effort

and 1 week of duration is assumed to work 8 hours per day.

• However, this is not necessarily the case, and different profiles can be defined for effort and expenditure:

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front-end loaded

back-end loaded

lineardistribution

1-monthcredit

1 monthup-front

activity

payment


Expense Authorization

• Project management and financial management are usually allocated to different structures

• According to the organizational structure, the power to authorize expenditures and payments might be solely on the project manager or require a more complex workflow.

• Rules take into account aspects such as: – funds availability – whether the required expense is budgeted or not – the amount of money (expenditures higher than a threshold

might require a special authorization)

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ProjectManager

AreaHead Finance Procurement

requestpurchase

requestquote quote?

quoteapprovequoteyes/no

request authorization

yes/noyes/no

confirmavailability

purchaseorder

actualexpense

decreaseavailability

fixavailability

currentavailability

Expense Authorization: an Example

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End of period Report

• At the end of each reporting period, documentation is produced about a project financial status

• Two information are available: – Budgeted expenditure vs. actual expenditure – Expenditure accounting

• The information is used in different ways: – To analyze deviations (what differences there have been) – To confirm/update projections to end – To evaluate project health and take appropriate actions

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The Workflow

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Budget Y1 Y2 Y3Personnel 4000 5000 3000Hardware 1000 2000Subcontracting 1000 6000…

ExpectedExpenditures

ActualExpenditures

invoices

Budget Y1 Y2 Y3Personnel 3000 5000 3000Hardware 500 2000Subcontracting 1000 6000…ledger

End of PeriodReport & Revision

report

Budget Y1 Y2 Y3Personnel 5000 4000 3000Hardware 500 1000Subcontracting 1000 6000…


What information you are interested in

• Budget: the amount initially budgeted • Transfers: the variations performed on the budget • Actual: the amount actually spent

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Budget Budget Variations New Spent Available

Personnel 4000 +2000 6000 5000 1000

Hardware 3000 -2000 1000 0 1000

Subcontracting 1000 1000 400 600

costing and budgeting - spmbook · • costing: determining the bare costs to deliver a project •...

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